posted at 12:41 pm on July 19, 2012 by Ed Morrissey

Two months ago, the Congressional Budget Office issued a stark warning to Congress over the fiscal impact of “Taxmageddon,” the upcoming expiration of the Bush-era tax rates at the end of this year. Allowing all of the tax rates to rise would push the US into recession:

Tax hikes and spending cuts set to take effect in January would suck $607 billion out of the economy next year, plunging the nation at least briefly back into recession, the nonpartisan Congressional Budget Office said Tuesday.

Unless lawmakers act, the economy is likely to contract in the first half of 2013 at an annualized rate of 1.3 percent, the CBO said, before returning to 2.3 percent growth later in the year.

Canceling those tax and spending policies would protect the recovery in the short run and encourage more vibrant growth, around 4.4 percent, in 2013, the CBO said. However, unless lawmakers adopt policies that would reduce budget deficits by a comparable amount down the road, the CBO said, the national debt would continue to climb, imperiling future economic growth.

Republicans want to follow the CBO’s advice and cancel the tax hikes, while looking for other ways to reduce spending rather than the sequestration policies set to take effect in January. Democrats want to hold both hostage to force the GOP to agree to Obama’s proposal to raise taxes on earners over $250,000 — or $1 million, depending on which Democrats one asks, and when. Will the economic impact of those tax hikes be much different than that of the full fiscal cliff? According to a new study by Ernst and Young … no:

With the combination of these tax changes at the beginning of 2013 the top tax rate on ordinary income will rise from 35% in 2012 to 40.9%, the top tax rate on dividends will rise from 15% to 44.7% and the top tax rate on capital gains will rise from 15% to 24.7%.

These higher tax rates result in a significant increase in the average marginal tax rates (AMTR) on business, wage, and investment income, as well as the marginal effective tax rate (METR) on new business investment. This report finds that the AMTR increases significantly for wages (5.0%), flow-through business income (6.4%), interest (16.5%), dividends (157.1%) and capital gains (39.3%). The METR on new business investment increases by 15.8% for the corporate sector and 15.6% for flow-through businesses.

This report finds that these higher marginal tax rates result in a smaller economy, fewer jobs, less investment, and lower wages. Specifically, this report finds that the higher tax rates will have significant adverse economic effects in the long-run: lowering output, employment, investment, the capital stock, and real after-tax wages when the resulting revenue is used to finance additional government spending.

Through lower after-tax rewards to work, the higher tax rates on wages reduce work effort and labor force participation. The higher tax rates on capital gains and dividend increase the cost of equity capital, which discourages savings and reduces investment. Capital investment falls, which reduces labor productivity and means lower output and living standards in the long-run.

Output in the long-run would fall by 1.3%, or $200 billion, in today‟s economy.

Employment in the long-run would fall by 0.5% or, roughly 710,000 fewer jobs, in today‟s economy.

Capital stock and investment in the long-run would fall by 1.4% and 2.4%, respectively.

Real after-tax wages would fall by 1.8%, reflecting a decline in workers‟ living standards relative to what would have occurred otherwise.

John Merline at Investors Business Daily also points out that the effects will be felt more in the very states that support Obama the most:

Connecticut, New York, New Jersey, Massachusetts and California — all blue states — would suffer the most, according to a Tax Foundation report.

The reason, the study notes, is that these states have higher shares of wealthy taxpayers than the rest of the country. In each of them, those making more than $200,000 — the taxpayers targeted by Obama’s hikes — account for more than 56% of all federal income taxes paid in those states. The U.S. average, the report notes, is 50%.

“As a result, a higher proportion of new tax dollars will come from these states,” noted the Tax Foundation’s Ed Gerrish, “likely impacting local economies.”

IBD also notes in a separate editorial that the Obama proposal fails Fed chair Ben Bernanke’s test on policy:

“Economic activity appears to have decelerated” from the tepid first quarter, he said, and “available indicators point to a still smaller gain in the second quarter.”

Bernanke talked about a “loss of momentum in job creation” and slower household spending growth for Q2.

Manufacturing, he said, “has slowed in recent months.” The rise in spending on equipment and software “appears to have decelerated.” Indicators of future investment “suggest further weakness ahead.”

In this context, Bernanke encouraged lawmakers to adopt the Hippocratic Oath and “do no harm.”

“Fiscal decisions,” he said, “should take into account the fragility of the economy.”

Clearly, Obama has prioritized re-election over the fragile economy. Why else would he talk about raising taxes as the economy slides toward recession, and the fiscal cliff guarantees one? In my column for The Fiscal Times, I write that the “you didn’t build it” comment relates directly to Obama’s view of the role of government in dictating economic outcomes, but mostly he just needs to fight Mitt Romney with good, old-fashioned class warfare more than he needs to position the US for recovery in 2013:

Once again, Obama wants to make this an issue of “fairness.” By arguing that it takes a village for anyone to succeed in a market, the President can argue for greater confiscation in tax policy, claiming that it will fuel a new level of success. …How bad will it be? In the long run, Ernst & Young concludes, the tax hikes will cost more than 700,000 jobs and reduce economic output by 1.3 percent if the cuts go to fuel more government spending, using today’s economy as a measure. Wages would fall by 1.8 percent, and investment would decline by 2.4 percent. If the proceeds of the confiscatory policies get used to fund a broader reduction in tax rates below current levels – which is not part of Obama’s proposal – output still falls by 0.4 percent.

This demonstrates the problem with excessive government interventions in markets, which always suppress growth to some degree. That is a rational trade-off, however, for a smoothly operating economy. However, we do not have a smoothly operating economy nor have we had one for the last several years, thanks to a crash created by government manipulation of the lending and securities markets to achieve favored social-policy outcomes, and an economic plan afterward that consisted of short-term gimmicks and escalating ambiguity in tax, regulatory, and monetary policy.

We need to find ways to stimulate growth, not suppress it. Obama’s argument that the village needs to confiscate more from those who invest and take risks to provide that growth is exactly the worst prescription possible for our ailing economy – and yet another demonstration that the President has learned nothing about small business or the economy after four years in office.

I wrote this earlier today, but it’s worth repeating: Small businesses and markets fund the government, not the other way around. The reason why we have the capital to seize for building roads, bridges, and other infrastructure is because of the wealth created by free markets. Without that wealth, the government could not sustain that infrastructure, and without the economic expansion and employment provided by risk-taking entrepreneurs, we wouldn’t need them at all. Obamanomics is completely backwards, which is why it’s not terribly surprising to see the economy heading in that direction, too.

Blowback

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Y’know … the picture used here reminds me of something …
I’ve ALWAYS seen a soul-darkness in Zero’s eyes.
LATELY, especially when he’s off TOTUS, those eyes are looking more and more like in this pic.
Sorta slow, half-closed, almost independently blinking.
Y’all keep that in mind the next time you can actually stomach watching his latest clips, and tell me if you agree ?
It’s beginning to look a bit creepier than normal.
ALMOST to the possible ‘what’s he on?’ place… seriously.
Eeerie.

In my column for The Fiscal Times, I write that the “you didn’t build it” comment relates directly to Obama’s view of the role of government in dictating economic outcomes, but mostly he just needs to fight Mitt Romney with good, old-fashioned class warfare more than he needs to position the US for recovery in 2013

It also relates to his failure to accept responsibility. While, on its face, its a slander of earners and successful individuals, it also connotates that failure is not your fault and can be projected onto someone else (the converse of the argument). Kind of puts the “Bush did it” arguments into a similar context, eh?

Obama’s “you didn’t build it” comments seem to imply that he invented the notion of building roads, of having police/fire, etc. and all of that is new and without Obama we would be in some sort of wilderness. We have had all those things for my entire life.

American voters, may you never recover from the shame you inflicted upon yourselves by voting into the highest office such a turd. Out with him, and mocked into oblivion, so as to never repeat such charlatanry.

I wrote this earlier today, but it’s worth repeating: Small businesses and markets fund the government, not the other way around. The reason why we have the capital to seize for building roads, bridges, and other infrastructure is because of the wealth created by free markets. Without that wealth, the government could not sustain that infrastructure, and without the economic expansion and employment provided by risk-taking entrepreneurs, we wouldn’t need them at all. Obamanomics is completely backwards, which is why it’s not terribly surprising to see the economy heading in that direction, too.

How about FACTS showed that when we had the same tax rates that President Obama is proposing our economy was booming, the rich were getting richer, the deficit..oh wait a minute? there was no deficit. We had a surplus. The 2001 and 2003 tax cuts were never meant to be permanent they were temporary that’s why they had an expire date.
Now all we have to do is do nothing. All the tax cuts have to expire for everybody, not just the high earners. We cannot afford them.

How about FACTS showed that when we had the same tax rates that President Obama is proposing our economy was booming, the rich were getting richer, the deficit..oh wait a minute? there was no deficit. We had a surplus.

The 2001 and 2003 tax cuts were never meant to be permanent they were temporary that’s why they had an expire date.

No, they were “temporary” because the Republicans in Congress couldn’t bring themselves to make them permanent, and when passed the Democrats controlled the Senate.

Now all we have to do is do nothing. All the tax cuts have to expire for everybody, not just the high earners. We cannot afford them

You forget that when the tax rates you envision were in place, the Federal budget was much smaller. As Limbaugh and others say, I’ll go back to the 2000 tax rates, IF you’ll go back to the 2000 Budget…DEAL? What we can’t afford is Obama’s SPENDING, that’s the D@mn problem, not the amount of money coming in, but the amount GOING OUT! What is so difficult to grasp about that?

The number of Americans filing new claims for unemployment benefits rebounded last week, pushing them back to levels consistent with modest job growth after a seasonal quirk caused a sharp drop the prior period.

How about FACTS showed that when we had the same tax rates that President Obama is proposing our economy was booming, the rich were getting richer, the deficit..oh wait a minute? there was no deficit. We had a surplus. The 2001 and 2003 tax cuts were never meant to be permanent they were temporary that’s why they had an expire date.
Now all we have to do is do nothing. All the tax cuts have to expire for everybody, not just the high earners. We cannot afford them.

Salahuddin on July 19, 2012 at 1:00 PM

You left out the crucial fact of how much the government spent during the Clinton years.

But please tell me what the tax rates will have to be and on whom to cover the 1.4 Trillion yearly deficits and start paying down the 15+ Trillion in current debt and preparing to pay the 100+ trillion in upcoming obligations (and how you plan on stopping the Democrats from growing government even more adding more spending that has to be paid for)?

Yeah we didn’t get into much debt during the Clinton years when taxes were higher. But spending was much much lower too. The spending is the problem not the revenue. What will tax rates have to be in order to balance our current budget and pay down the debt?

Tell that to St. Reagan who in 1982 during a recession signed $100 billion tax hike—the largest tax increase since World War II.

Salahuddin on July 19, 2012 at 1:26 PM

Go do some research beyond Dem talking points.
TEFRA was a deal between Reagan and the Dem controlled Congress (both houses) to reverse some planned future tax cuts and close some loopholes – but with no change in tax RATES. Part of that deal was to reduce spending $3 for every $1 in tax increase – but the Dems violated that agreement and jacked up spending anyway by overriding Reagan’s veto on the budget bill they passed.

Two months ago, the Congressional Budget Office issued a stark warning to Congress over the fiscal impact of “Taxmageddon,” the upcoming expiration of the Bush-era tax rates at the end of this year. Allowing all of the tax rates to rise would push the US into recession:
===============

Some awesome news: all 17 states that elected a Republican governor in 2010 has seen a reduction in their unemployment levels. In just over a year and a half since those new executives took office, these states have seen some serious improvement:

Tell that to St. Reagan who in 1982 during a recession signed $100 billion tax hike—the largest tax increase since World War II.

Salahuddin on July 19, 2012 at 1:26 PM

Right, we had a huge deficit, the Democrats promised spending cuts if we raised taxes, we raised taxes; raised spending MORE and the deficits went UP.

Then Bush Sr (read my lips), we had a huge deficit, the Democrats promised spending cuts if we raised taxes, we raised taxes; raised spending MORE and the deficits went UP.

But now we have a huge deficit and Democrats promise if we raise taxes they’ll cut spending and lower the deficit.

You can trust them Charlie Brown, surely you’ll get to kick the football this time, they wouldn’t be lying to you AS THEY HAVE EVERY OTHER TIME.

Nope, not buying it. Cut spending first, not last. Your side has cheated on this deal both times it has been done in the past; I see no reason to let you go 3 for 3 lying to get your way and screwing over the economy.

But feel free to explain why we can trust you this time when you’ve failed to meet your promises the last two times we tried.

The smartest man in history does get some good advice, every POTUS does. He just chooses to ignore it.

Steve Jobs told the Shizhu-Slayer that he’d love to build Apple products in the US if he would slash the onerous amount of regulation involved in setting up a manufacturing base here. The Mastiff-Masticator apparently looked uncomfortable and muttered something about being late for golf.

lol, lowereastside also tried calling her a gold-digger the other day. When I reminded her that the rich evil corporation that Ann’s father founded and built beginning in 1946 still exists today and is bigger than ever, she stopped wanting to play.

Wow, that’s HUGE change in Michigan !! Cool !
Family still there tell me some libs are actually (begrudgingly ??) feeling the overwhelming crush of the Dem years, and agreeing to GOP ideas, since things couldn’t really get any worse.
Happy for them, there, and a glorious turnaround in that state would be AWESOMELY AWESOME !!

Study shows…
How about FACTS showed that when we had the same tax rates that President Obama is proposing our economy was booming, the rich were getting richer, the deficit..oh wait a minute? there was no deficit. We had a surplus. The 2001 and 2003 tax cuts were never meant to be permanent they were temporary that’s why they had an expire date.
Now all we have to do is do nothing. All the tax cuts have to expire for everybody, not just the high earners. We cannot afford them.

Salahuddin on July 19, 2012 at 1:00 PM

Reid, get back to work not passing a budget and giving our country away peice by peice through treaties and appointing communist judges.

You need to earn that lifetime million dollar a year pension and “seperate but equal” healthcare plan you have.

Via Andy Garcia: “America never needed transformation in the first place, and we certainly never needed Barack Obama. This is precisely why he cannot destroy us, despite his best efforts or missteps; we have too much going for us. After all, where else could a man who never actually held a real job, who talks of saving humanity in general while never having ever saved anyone in particular, whose life is so shrouded in mystery as to be a work of fiction — where else could this man become president?”

Via Andy Garcia: “America never needed transformation in the first place, and we certainly never needed Barack Obama. This is precisely why he cannot destroy us, despite his best efforts or missteps; we have too much going for us. After all, where else could a man who never actually held a real job, who talks of saving humanity in general while never having ever saved anyone in particular, whose life is so shrouded in mystery as to be a work of fiction — where else could this man become president?”

Could not believe this came from a Hollywood type.

samazf on July 19, 2012 at 5:59 PM

Garcia’s been a conservative for some time. He made a movie years ago about the revolution in Cuba which was largely panned by the liberal glitterati because it told the truth about Castro and his predecessor.

1982 TAFRA was a deal between Reagan and Dem controlled Congress (both houses) to close loopholes and delete future tax rate increases in return for $3 in cuts for every $1 in resultant tax increase.
Top marginal tax rates:
1971-80 – 70%
1981 – 69.13%
1982-86 – 50%
1987 – 38.5%
1988-89 – 28%
1990-92 – 31%
1993-2000 – 39.6%
2001-02 – 38.6%
2003-12 – 35%
In 1982 the top marginal tax rate was also significantly reduced. Revenues went up, but the Dems controlling Congress violated their agreement and increased spending – overriding Reagan’s veto of the budget bill that did that.
So look at those years and tell me again when it was we had a good economy and increased revenues.

Speed reading. I’m sure I’ve missed much of the nuance.
A little comedic light, for our souls, and just plain hard facts.
Bless you all. I am fortunate to be very busy — with pay!
Spread all of your thoughts to the non-choir. That’s the challenge.

And, I think if Mitt can hold the ball or score, over and over…
That’s football, American.
Pummel this useless cabal.

Actually, I do think carpet bombing is in order. Destroy with their own lies.